CHICAGO - The authority that runs Detroit's convention center is hitting the market Wednesday with $300 million of bonds, marking its first public offering since it took control of Cobo Hall from the troubled city in 2009.
The debt, to be issued through the Michigan Finance Authority, will be backed by hotel taxes collected in the authority's three-county area as well as a statewide tax on liquor and a state pledge of an annual transfer from the cigarette tax revenue.
The transaction will roll over a 2011 private placement, and generate funds for capitalized interest and a debt service reserve fund.
The deal comes the week after Detroit nailed a final settlement with its last major holdout creditor, a deal that's expected to speed the city's exit from its historic bankruptcy.
The settlement, with Financial Guaranty Insurance Co., would give the bond insurer the property that is currently the site of Joe Louis Arena, which is adjacent to Cobo Hall. FGIC plans to build a 300-room hotel, condominiums, and retail space on the site, largely to serve the convention center, after the arena is demolished.
Along with the new FGIC development, Cobo is located on a stretch of downtown riverfront land that officials hope will be a key part of the city's recovery.
Home to the prestigious North American International Auto Show, Cobo is one of the city's largest economic engines.
The Detroit Regional Convention Facility Authority, created in 2009 by state legislation, leased the troubled convention center from the city for 30 years after years of declining performance and threats from auto makers to pull out of the show.
The new financing is driven by a November 2014 deadline in the 2011 financing. At that point, interest rates on the privately placed debt would spike to 7%.
In a road show promoting the deal, officials emphasized the separation between the convention authority and the bankrupt city, both in terms of the management structure of the authority as well as the revenue pledged to pay the bonds.
The cigarette, liquor, and hotel tax revenues have been growing on average over the last few decades, and debt-service coverage should total 3.5 to four times, according to the finance team.
The state liquor tax and three-county accommodations tax are collected by the state treasurer and sent directly to the bond trustee for deposit in the debt service fund, according to the road show.
"Pledged revenues are dedicated to repayment of the Series H bonds regardless of whether the convention center remains in operation," the finance team noted in the road show.
Authority officials said that population gains are expected in the authority's three-county region of Wayne, Macomb, and Oakland counties, even if population losses continue in Detroit.
Standard & Poor's has assigned an AA-minus rating with a stable outlook to the debt.
"We expect strong debt service coverage levels through maturity and that no substantial dilution of coverage will occur," analyst Gabriel Petek said in the ratings report.
S&P also noted that the convention authority does not have the authority to issue additional debt, the authority's operational independence from the city's bankruptcy, and the additional bonds test.
Risks include "the potential for volatility of the pledged revenue stream and the ability of the state Legislature to change tax rates comprising the pledged revenues," Petek said.
In 2010, the authority issued $80 million of short-term debt to finance a $20 million payment to Detroit for the 30-year lease as well as a series of emergency repairs.
The board undertook a $280 million overhaul of the facility and its finances.
The authority in 2011 refinanced the 2010 notes and borrowed another roughly $260 million, in a private placement with three banks, JP Morgan Chase, PNC Bank, and Wells Fargo NA.
The proceeds financed the $280 million renovation, which is now more than 90% complete.
The Michigan Finance Authority will issue the bonds as local government loan program bonds, series 2014 H on behalf of the convention facility authority.
JPMorgan is the senior book-running manager on the upcoming financing.
Wells Fargo Securities, Bank of America-Merrill Lynch, Loop Capital Markets, and PNC Capital Markets are also on the deal.
First Southwest is financial advisor and Miller, Canfield, Paddock and Stone PLC is bond counsel.